New Zealand Monetary Policy

At its 23 July monetary policy meeting, the Reserve Bank of New Zealand (RBNZ) decided to reduce the official cash rate (OCR) from 3.25% to 3.00%. This is the second meeting in which the RBNZ has decided to modify the cash rate following six consecutive meetings at which the Bank kept the rate on hold.

Regarding the international environment, the Central Bank noted that, “global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.”

The Central Bank mentioned that New Zealand’s economy is growing at around 2.5% per year, supported by high net migration and construction activity, as well as by accommodative monetary policy. Nevertheless, according to the RBNZ, prospects are weaker than last month, as reconstruction activity in Canterbury reached its peak and the fall in dairy prices has been sharper than expected.

The Central Bank expects inflation to remain below its target range of 1–3% throughout this year as a result of the past strength of the New Zealand dollar and the fall in oil prices. The Central Bank expects inflation to come back to the middle of its target range by the beginning of 2016, thanks to the recent depreciation of the NZD and as the effect of the decline in oil prices vanishes from annual figures. However, uncertainty remains regarding the timing of the pass-through from the recent depreciation of the NZD to higher prices. Regarding the NZD, the Central Bank added that the currency has fallen significantly since April and that it expects further depreciation given the low dairy prices. However, the RNBZ noted that house prices continue to grow rapidly in Auckland, while house price inflation remains subdued in the rest of the country. Despite renewed construction activity in the area, the Central Bank expects that imbalances in Auckland’s housing market will take time to be corrected.

The RBNZ suggested that further cuts in the OCR can be expected, highlighting that, “a reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely.” The next monetary policy meeting is scheduled for 10 September.

FocusEconomics panelists expect that the OCR will end this year at 3.38%. For 2016, participants see the interest rate ending the year at 3.58%.

Author:Eric Denis , Economist

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